Global stocks drop on economic jitters

Asian stocks tumbled on Tuesday, as confidence in the recovery ebbed and falling commodity prices and a sharp drop on Wall Street spooked investors into taking profits and buying the yen for safety.

Major European stock market futures pointed to a lower open and U.S. S&P 500 futures were down 0.2 percent, with selling based on skepticism about recovery prospects spreading.

Questions about the extent of Chinese restocking of various commodities weighed on base metals prices and oil overnight, with U.S. crude dropping below $67 a barrel, down $6 from an eight-month high reached on June 11.

The U.S. recession was widely viewed as ending sometime in the second half of 2009, but that has already been priced in, leading investors to trim positions into the end of the first half and wait for further confirmation.

Optimism over the prospects of economic recovery have already been factored into equity and commodity markets, so now people are standing back and reassessing. Oil will probably track sideways -- probably between $65 and $70 -- over the next week, said Ben Westmore, commodities analyst with National Australia Bank in Australia.

The rush to safety near the end of the quarter propelled Japanese government bonds, with the yield on 10-year bonds at a one-month low.

Big liquid markets were sitting targets for investors looking to cut down their exposure to risk.

Japan's Nikkei share average fell 2.8 percent , with buying limited to some companies which are seen being less affected by the global economy, such as those in the pharmaceuticals and food industries.

The MSCI index of Asia Pacific shares outside Japan dropped 3.3 percent, falling to the lowest in about a month. The index has declined for six of the last seven trading days.

In the last 20 days, the index has slipped 0.4 percent, compared with a decline of 2.5 percent on the all-country world index . The premium that investors had placed on Asia's growth prospects was being whittled away.

The S&P 500 index of U.S. stocks on Monday posted its biggest one-day loss in two months, closing below its 200-day moving average for the first time in 15 days.

VOLATILITY POPS

Though companies will likely keep refilling inventories of materials, prospects for final demand for products are still highly uncertain.

As a result, copper for three-month delivery on the London Metal Exchange slipped 0.3 percent to $4,745 a tonne after dropping 5 percent on Monday. Year-to-date copper was still up 53 percent.

U.S. oil for August delivery was down 1.4 percent to $66.56 a barrel, while Brent crude was down 1.3 percent to $66.11.

After the Chicago Board Options Exchange volatility index, better known as the VIX gapped higher for the second time in June last night, knee-jerk demand for yen increased.

The U.S. dollar dropped to the lowest since June 1, at 95.03 yen, down 1 percent. The Australian dollar was down 1.8 percent to 74.01 yen.

Government bonds rose slightly, with downward pressure on global equities sending investors to relative safety. Still, with a record $104 billion in U.S. Treasury auctions this week, risks of holding U.S. government debt were higher than usual.

The benchmark yield on the 10-year Treasury note edged down to 3.67 percent from 3.70 percent late on Monday and off 33 basis points from an eight-month high reached on June 11.

The 10-year Japanese government bond future rose 0.44 point, up for an eighth consecutive session, while the cash yield dropped 5 basis points to the lowest since May 18 at 1.405 percent.

Some investors who missed some or all of the big rebound in global equities that began on March 9 and eventually dragged up commodity prices may be looking for an entry point now. As they move out of cash and buy cheapened assets, the late comers may limit the move lower in risky securities.

A lot of institutional money remains on the sidelines and may be put to work in case of market declines, limiting the size of any correction, said Dariusz Kowalczyk, chief investment strategist with SJS Markets in Hong Kong, in a note.